FMCG
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Heinz’s success in Britain and Canada naturally led it to look to Australia where a business was established in 1935 and again run with a completely local focus. The company mirrored its UK success, building up commanding positions in baked beans and soup. Although Heinz retained a booming export business, it was 1957 before they ventured abroad again. In what can only be described as an opportunistic rather than strategic expansion policy, Heinz purchased: a Dutch preserves company, built a factory in Venezuela in 1959, a joint-venture in Japan in 1962, an Italian baby-food business in 1963 that would prove a goldmine, a Mexican venture in 1964 that never made a cent, and in 1965 the British arm of the company bought a Portuguese tomato processing company.
The only one of these moves to have lasting significance was the 1963 purchase of the Milan-based Societa del Plasmon, whose business was predominantly baby biscuits, plus an insignificant range of strained baby foods. Heinz installed their latest equipment and processes for making strained baby foods, which, under the highly respected Plasmon brand name, soon became brand leaders in Italy. Baby food in Italy was and is regarded by the consumer as highly complex food bought mainly in pharmacies and thus able to command premium prices and high profit margins. Although Italy has one of the lowest birth rates in the world, it accounted for 25% of total European sales of baby food by the mid-1990s. It was an environment in which Plasmon managed to double its sales between 1987 and 1992, and now is the company’s centre of excellence for baby food.
To manage this growing collection of mostly stand-alone businesses, Heinz gradually imposed some degree of head office control and coordination. Yet today Heinz remains more decentralised than most global companies: until 1959, overseas affiliates only had to consult head office for major capital investments and board-level appointments. In 1968, Gookin broke down the company’s international division and made each affiliate a profit centre in its own right. An accounting scandal in one affiliate during the 1970s meant that head office’s Global Headquarters Group took a much closer interest from that point on, approving and monitoring progress against annual budgets.
When O’Reilly took the helm in 1979, one of his top priorities was to push the Heinz brand much further afield. The realisation that Heinz only marketed its products in countries accounting for 15% of the world’s population, and almost none in predicted future growth areas, galvanised the company to look seriously at entering developing markets. Much as they had led the way in setting up in the UK, Heinz was ahead of the curve in its entry into China. In 1984, only four years after China opened itself up to the West, Heinz was invited to manufacture infant cereal to address an endemic shortage of fortified weaning food. Initially the joint venture – agreed and signed in an amazing seven months - was for Heinz to operate only in Guangdong Province, where their new factory opened in June 1986. Being so early into China meant that Heinz had no other western companies to learn from but, conversely, they benefited hugely from first-mover status. They were among the first western companies to advertise on television in China and soon came to grips with the challenges of selling and distributing within the country. Two years later the factory had to be tripled in size and by the mid-1990s, Heinz was selling in 25 cities spread across half the country. It could now be found in Africa, Asia and Eastern Europe, and was setting up in South Korea, Thailand, Botswana, Egypt and, in 1994, India. There Heinz purchased Glaxo’s Family Products division, primarily the Complan and Glucon D nutrition brands.
Heinz also did not neglect developed markets. They returned to Spain in 1987 (where they had previously sold an olive business), Greece in 1990 and New Zealand in 1993. Here they acquired, for $300 million, Watties Ltd, the largest food company in Australasia, and with substantial exports into Australia. In 1997 Heinz acquired Poland’s leading producer of ketchup, Pudliszki. Weight Watchers International, under Heinz’s management, boomed overseas, generating 40% of its business outside of the United States, particularly as countries took over the brand manufacturing side.
Under O’Reilly, overseas operating divisions became less independent and were encouraged to adopt successes from other markets: for example the UK launched 9-Lives in 1993. But a key part of Heinz’s international success lay in catering for local tastes. Thus the flagship Tomato Ketchup brand had significantly different recipes in the major markets: sweeter in the UK, Australia and Venezuela, but spicier in Central Europe.
The O’Reilly Years
It is very rare that a business progresses equally on all fronts. Rather a few runaway successes happen simultaneously. This is what happened for Heinz during the 1980s. The food-service side of the US business - previously something of an orphan once it had been separated out - more than doubled its sales during the decade. So successful had the operation become that Heinz were prompted to make a major acquisition in 1991 of JLFoods for $540 million from its Canadian owner, John Labatt Ltd.
A second gusher of the 1980s was Weight Watchers. The meeting side of the business thrived under Heinz’s more entrepreneurial approach. They came up with innovations such as the “At Work” programme, reflecting the fact that the majority of women were now to be found in the workplace.
The food side of the business was a runaway success once Heinz’s food scientists got to grips with developing low calorie meals that tasted just as good, if not better than regular ones. An early switch into microwaveable fibreboard trays in 1982 again fitted in with the busier lifestyles of the target market. Despite competition offered by the launch of Stouffer’s Lean Cuisine in 1982, Weight Watchers went on to record share growth for 62 successive quarters. Powered by a constant stream of new products, they more than doubled the size of the business. By 1988, they were not only outselling Lean Cuisine but Weight Watchers branded frozen desserts were outselling Sara Lee.
However, the Weight Watchers growth ran out in 1990 and 1991, prompting O’Reilly to carve out a stand-alone company to give the brand the focus it needed to return to growth. The new Weight Watchers Food Company had its own sales, marketing, R&D, finance and some manufacturing functions. 40% of production and back end services such as purchasing and distribution would be handled by other Heinz units, in particular the frozen food division, Ora-Ida. The new management had the remit to challenge and re-invent everything, which they duly did, slashing new product lead times by a factor of six and re-formulating and re-presenting over half its 240 product lines within the first 15 months of operation. The new product range met the need for members to take a more personalised approach, moving away from the prescriptive regime, which had been the basis of the original Weight Watchers. New ranges such as Smart Ones and Personal Cuisine helped modernise the brand and grow sales.
The other big sales success of the 1980s had been the StarKist business. StarKist had expanded into the dog food market with a couple of acquisitions, most notably Jerky Treat in 1979, which trebled its sales within the next two years. The company built on this success, launching Meaty Bone and so creating the indulgent dog treat sector almost single-handedly. The entire product range was booming as the pet category had become one of the fastest-growing in the supermarket.
The tuna side of the business was also humming with the company shipping 40% of America’s total consumption aided by having the majority of private label production. With record market shares on all fronts and annual sales approaching $1 billion, it had been a marvellous acquisition that had papered over a lot of the cracks in the mainstream US business.
However, the tuna business was changing. New fishing areas had opened up in the Pacific. This created a glut and the resulting price war exposed Heinz’s relative high wage overhead compared to lower cost new entrants. The decision was taken to de-emphasise branded competition in tuna and basically to run a tuna procurement operation to supply the marketing-driven pet food side. Heinz wanted to place bigger bets in pet-food which, as a growth category was far out-stripping most other parts of the portfolio. However its profit record had not yet matched its sales s
uccess. Three acquisitions were made within the space of nine months to beef up the pet portfolio, doubling the size of the business. In addition to a strong roster of brands, the company was now the largest supplier of private label to the American market.
But Heinz had not been the only company attracted to the pet-food market. Several other packaged goods giants had also either grown or bought their way into it. Pet-foods became a price football within the major retail chains (so much so, specialist pet stores almost exited the battle field to concentrate on high-end products). These retailer-driven price wars eroded margins and forced Heinz to rethink their approach. Despite their recent growth, Heinz were minor players in pet foods, with a portfolio of second-tier brands. As they already had a very well established private label programme, the decision was taken to switch from a consumer to a customer focus (as they had effectively done years earlier with soup).
The premium pet snacks business, which brought much higher margins, maintained its consumer-led strategy but the mainstream pet food business switched over to a private label/fighter brand approach. The results justified the change: volume share, including private label, almost doubled by the mid-1990s, as did the profits.
Heinz emerged from the 1980s in far better shape than they had entered it:
· The US mainstream business had at least started to turn a decent profit
· They had made some highly successful acquisitions
· The company had expanded its footprint globally and margins had increased substantially
· Heinz was widely recognised as a well-run company who were in cost-control, boosting their margins by almost 50%,
· Consumer marketing had become more innovative with the revitalisation of the ketchup business with new lines such as the plastic bottle
· Retail relationships were strong; the company was one of the few brand leaders to successfully incorporate a substantial private label component
· Food service business was booming.
Heinz was now unrecognisable from the sleepy, almost moribund company of the mid-1960s. In 1986 the company was rated one of Dun’s Business Month’s five best-managed companies and in 1990 O’Reilly was voted Chief Executive of the Year by Chief Executive Magazine. There had been some failures, such as frozen pizzas and frozen cookie dough, and it could be argued that not enough of the growth was coming out of the core Heinz branded products, but it was still an impressive turnaround. By the end of the decade, Heinz’ sales had doubled and net profits quadrupled since 1980; market capitalisation having increased ten-fold from when O’Reilly had taken over.
While O’Reilly had benefited from several of the businesses simultaneously performing well, the 1990s began with several of them doing badly. Very few of Heinz’s products could genuinely carry a price premium so price wars in pet-food and tuna meant Heinz had to respond; also, gluts in the supply of tomatoes and potatoes – the main ingredient of the Heinz brand and Ida-Ora brand respectively - gave private label the opportunity to widen the price differential with Heinz’s leading brands, which put pressure on volumes as value-conscious consumers traded down. New distribution channels such as Club stores were also putting the squeeze on margins.
O’Reilly responded aggressively, convening his top managers from around the world in February 1992 and issuing a challenge to drive through radical change. Market shares had to be restored and costs had to be slashed. The areas of focus were savings in procurement, reducing overheads, and improving marketing spend efficiency. Heinz was still more like a federation of independent companies rather than a cohesive multi-national so it is unsurprising that cost efficiencies and savings were also to be found by introducing more elements of centralisation. Thus purchasing operations were consolidated with the company seeking a small number of low-cost global suppliers. All the North American Heinz business units moved to one centralised back office for order processing, receivables and related functions. 40% of 1990s marketing budget was diverted from mainstream media and towards in-store activity and price support. Although 1994 sales were no greater than they had been in 1990, Heinz emerged from a two-year period of change with healthier market shares, a healthier bottom line, and a healthier, more aggressive management culture.
The acquisition strategy was also ramped up. JLFoods and Watties had transformed both the food service side and the potential for Heinz in Asia and the Pacific. These were followed up by Heinz acquiring the Farley’s brand of baby biscuits in the UK, the All American Gourmet Company, makers of the Budget Gourmet frozen food range, and in March 1995 Heinz paid over $700 million to almost double the size of its pet food business, acquiring Quaker Oats’ pet division. This was followed a year later by the acquisition of Earth’s Best, a maker of organic baby food. The acquisition surge prompted the company to take a serious look at its structure.
How Are They Structured?
It is fair to say that, by 1997, Heinz was a somewhat convoluted company despite the best efforts of O’Reilly towards centralisation. In the US it had five major business units:
· Heinz USA, the largest affiliate in the company, covered ketchup, baby foods, sauces and condiments; it also had a very substantial private label soup business and a booming food service arm
· Star-Kist Foods, which was spilt into two divisions, Heinz Pet Products and StarKist Seafood (whose consumer business had been boosted by the company going ‘dolphin-safe’)
· Ora-Ida Foods, the country’s largest processor of frozen potatoes to both retail and food service, branded and private label, together with a collection of frozen food brands in a variety of categories
· Weight Watchers International, which ran the meeting side of the business in over twenty countries, fitness facilities and even a publishing arm
· Weight Watchers Food Company, which produced a range of over 250 Weight Watchers by Heinz branded products across frozen, chilled and ambient
Outside the USA, there was barely a food category the company didn’t compete in, more often than not under a brand name other than Heinz. In Italy the company made soft drinks, in England canned meats, in Zimbabwe soap, margarine in Korea, maple syrup in Canada and ice cream in New Zealand to mention a few. It was not a streamlined business. In 1997, Heinz embarked on what would seem a never-ending series of restructurings to get cost out and bring more coherence to their structure. They began with the $500 million sale to McCain Foods of the Ora-Ida food service and private label set-up.
O’Reilly passed the CEO baton to Heinz insider, William R. Johnson, who had a track record of simplifying and getting costs out. So Heinz set about closing or selling 25 factories and shedding thousands of staff. The retail side of Ora-Ida was combined with Weight Watchers Foods to create a new unit, the Heinz Frozen Food Company. This was then followed immediately by another downsizing as Heinz planned to close 20 of its remaining 100 factories. In 1999, the company sold Weight Watchers International to a Swiss venture capital firm for $735 million, as it had nothing to do with the running of a modern food business. At around the same time, rumoured merger talks with Bestfoods petered out, leaving Heinz to continue restructuring. The changes would improve Heinz’s operating margin by four points up to 18.5% by 2000, better than was being managed by the soon-to-be-merged giants, Unilever and Bestfoods.
Organisationally, the biggest change was to change from a geographic management structure to a category one. Six key categories, accounting for over 80% of the company’s sales, became the backbone of the new structure. For the new millennium, Heinz would be globally managed for the first time with the six core categories being:
· Ketchup, Sauces and Condiment
· Food Service
· Infant Feeding
· Tuna
· Quick-serve Meals
· Pet Foods
Heinz also focused its efforts behind its six core markets that generated 80% of company revenue: the USA, UK, Italy, Canada, Australia and New Zealand.
By 2000, although the restru
cturings had yet to pay off in terms of growth (top-line sales in the year were virtually identical to 1996), within the above categories the company had brands with number one or two positions in more than fifty countries and was generating nearly half its $9.4 billion sales from outside the USA. However, following another spate of acquisitions, products branded as Heinz now accounted for less than one-third of sales. The ketchup business benefitted from the category focus and the increased marketing spend, which was funded by the factory closures. It grew by nearly 10% in the year and reached a healthy 54% share in the USA, with innovations such as the EZ Squirt bottle and green ketchup still in the pipeline. Food service grew by 12.5% in the year to become a $1.6 billion business in its own right.
However, by far the largest organisational change to date, which resulted in the Heinz business of today, came in 2002 when Heinz spun off large parts of its US business and merged them with Del Monte. Thus, the US and Canadian pet foods and pet snacks business, tuna, infant feeding (where Heinz trailed dismally behind Gerber), retail private label soup and gravy, and their College Inn broth business were all hived off. The logic was unassailable. These were businesses that lowered growth rates, margins and had next to no synergy with Heinz’s mainstream brands. The move led to the Heinz US business being greatly simplified (SKU count dropped from 13,100 to 7, 300) and leaving it focused on just two key areas: Ketchup, Condiments & Sauces (bolstered by the acquisition of Classico premium pasta sauces), and Frozen Foods (where the company had recently acquired rights to produce products under the TGI Friday brand name). At a stroke the Del Monte deal made Heinz the most internationally diversified US-based food company, reducing its US component to 44% of sales.
Organisationally, the company adopted the by now usual matrix structure of large, global companies: with a category structure for brand management and innovation, and a regional structure for implementation. By 2012, the company would re-focus again around the three main retail categories of Ketchup, Condiments & Sauces, Meals & Snacks, and Infant/Nutrition.